Book 2 Chapter 5 Currency Pair Reversal Points - Pivot Points.

The currency pair pivot point is one of keystones in trading at Forex.

First of all, let us introduce the following designations (notions), necessary for the subject.

"High" is the maximum at the previous day;

"Low" is the minimum at the previous day;

"Close" is the price of closing at the previous day.

Generally speaking, there are the three principal criteria.

1.  There is the stock reserve (cruising range) - i.e., the difference between Low and High per the trading session. For instance, as regards GBP/USD pair, this difference can exceed 100 points in a trading day.

2.  The reader must also consider the reversal point of the currency pair movement (the pivot point) in the daily trading session. Thus, it is easy to calculate the possible profit that could be gained by a trader regularly.

3.  If "the trend is the friend" (see Book 1), it is necessary to work along the trend direction. Under these conditions, the detection of the trend pivot points can prevent losses that could be conditioned by the following factors

•  A change in the trend direction.

•  Besides, this conception of the trend pivot points permits us to understand when a deal must be opened in a new trend - i.e., in the beginning of the currency pair movement but not in the middle of it. The author especially doesn't recommend opening a deal at the end of a new trend.

Briefly to say, the skill of detecting the real pivot point is necessary for the regularly gaining of profit at Forex (for pity, the knowledge of it is insufficient).

The given system makes the foundation of the Pivot Points tactics, well-known all over the world (in detail, see http://speculator-fin.ru/page.php?id=64).

The pivot point can be calculated according to the formula: Pivot=(High+Low+Close)/3

(the designations introduced are submitted above).

After the calculation of Pivot, one can determine the levels of resistance and support according to the formulae given below:

R1=2Pivot - Low
S1=2Pivot - High
R2=Pivot + (R1 - S1)
S2=Pivot - (R1-S1)
R3=High + 2*(Pivot - Low)
S3=Low - 2*(High - Pivot)
Here R1, R2, R3 are the levels of resistance; S1, S2, S3 are the levels of support.

Thus, in its essence, the Pivot Points tactics is binary (binomial). That is, the next move is the logical continuation of the previous one. The point of reversal (pivot) is the keystone of this movement. The trend is going on. Subsequently, the point of reversal (pivot) of the given trend is being shifted.

Not without a reason all first-rate banks and fund institutions make use of such simple calculations during 50 years and more (see http://forum.fxclub.org/showthread.php?t=26915).

Briefly to say, this classical tactics of Pivot Points is well known all over the world. However, the application of it still could not change the ratio of successful traders to losers (1/20).

Now the reader must try to see the drawbacks of the classical method of detecting Pivot Points. The goal is to understand the advantages of the Pivot Points technique according to Masterforex-V system.

1. How one can pick out an appropriate time frame for calculating the maximum (or minimum) and the price of closing. One must keep in mind that Forex market is functioning twenty-four hours a day regularly. That is, in Europe, America and Asia pivots are different under the same conditions. The reason is that the three variables mentioned (High, Low, Close) are different in various countries.

Let us emphasize again.

Pivot=(High+Low+Close)/3

"High" is the maximum of the previous day;

"Low" is the minimum of the previous day;

"Close" is the price of closing at the previous day.

For instance, one can take a look at a chart that depicts USD/JPY pair movement during May 22-24, 2006. There it is clearly depicted that the next-day pivots in Moscow, Tokyo, London and New York would be cardinally different. Evidently, it is conditioned by the difference in calendar days. Consequently, all the three components of the classical Pivot Points are depicted in the above-submitted expression (High+Low+Close)/3).

Chart 2.4.1.

The Pivot points are calculated arithmetically. The result is rather an arithmetic-mean magnitude (as the moving average) than the determining of a real point, after crossing of which the currency logically makes a spurt (jump) towards the opposite direction.

For instance, the pivot arithmetic-mean magnitude can be equal to 50% of the recoil. As it is evident, this value cannot be helpful in a flat. What is more, it can even be harmful in the flat if the recoil could reach 62% and 76%.

For instance, a trader can open a deal at 50%-recoil against the trend. At the same time, the currency at 62%-recoil makes the U-turn (reversal) towards the previous trend continuation.

As an example, the reader can look at Chart 2.4.2. This figure clearly indicates that on June 6, 2006 EUR/USD had fallen from the local maximum at 1.2981 down to 1.2922. After this, it raised by 76% - up to 1.2962. Further, within the intra-day trend, the currency pair has ascended down to the point 1.2594. Approximately this makes about 400 points.

Chart 2.4.2.

In addition, the reader must take into account the following factors. During a day a currency can cross the Pivot Point towards different directions several times. This is why the classical Pivot Point cannot be regarded as a real point, at which deals should be opened.

As an example, let us examine EUR/USD pair movement on June 14, 2006 (see Chart 2.4.3 - M-15 chart).

To start from the currency pair movement on June 13 2006, the pivot has made (1.2617 + 1.2529+ 1.2545)/3 = 1.2564).

Chart 2.4.3.

A Pivot must be dynamical. The author states the following. A currency pair can go through 70-100 points in European trading session. At American session, the pivot must change its value - as the true (real) point of reversal. For instance, it can be the reversal correction beginning of the Pivot previous value. Under such conditions, a trader can close his deals before the beginning of the reversal in question. Otherwise, a trader can keep on a deal being opened along the trend further on (a "long-term" deal). This is possible if the price would not "cross" the Pivot towards the reverse (opposite) direction.

Let us examine a chart that depicts GBP/USD pair movement during June 29-30, 2006.

As one can see, the currency pairs have broken through the Pivot Point during the weekly trend. However, these currency pairs have not once crossed the pivot point towards the opposite direction during the session trend - notwithstanding the fact that these currency pairs have passed through several hundreds of points during a day and a half.

Chart 2.4.4.

Chart 2.4.5.

In different time frames the pivot must indicate different points. One must distinguish the reversal in the intra-day trend from the reversal in the intra-week trend. Then, again, the trend of duration of several weeks presents the principally different pattern - and so on.

However, according to the classical approach to Pivot-Points problem, just one value is considered - i.e., that of the previous day. Hence, there logically arises the following question. The reversal of which trend does the pivot make? Again, the reader must keep in mind that this pivot is calculated according to the above-given formula (High+Low+Close)/3 on the previous day.

R. Axel (from Dow Jones Agency) has developed his own technique of the pivot calculation when the levels of the previous day don't fit into this formula (High+Low+Close)/3. This discrepancy also confirms that the classical method of determining Pivot Points is imperfect.

One can make the following conclusions. The above-given examples clearly illustrate the principal difference between approaches to the notion of Pivot Point as a real point of reversal of currency pairs at Forex. That is, there is the Forex classicists' approach and, in contrast to it, Masterforex-V's viewpoint. According to the latter system, the following procedures must be done.

1. One must calculate the correction and reversal in various TF - to start from the intra-day session (M15) and up to several weeks (D1). This clearly depicts the difference between the correction and reversal. For instance, the following situations can take place.

•  The reversal can occur during the session trend when the currency pair movement does not exceed Pivot in a weekly trend, which is equal to the weekly session correction but not to the reversal.

•  The reversal can occur during the session trend when the currency pair movement does exceed Pivot in weekly trend. It is the first sign of the reversal that can occur within the weekly trend.

2.  Such correlation between the two types of trends permits us to do the following.

•  To gain profit during the session trend.

•  To understand the duality (binarity) in the direction of the currency pair movement (the continuation or cancellation (abolition) within a session trend or longer types of them.

3. The 50%-recoil indicates rather not the trend reversal but quantitative changes in it. Here is implied either the further development of the currency pair movement or the given pair transition to the flat. According to Masterforex-V, one must correlate these tendencies with other factors - such as the time of movement, correlation between the ally currency pairs and technical levels in various TF, etc.

Now let us regard this problem as it is presented in Masterforex-V Trading Academy. Again, one must take a look at the chart where EUR/USD pair movement during June 5-6, 2006 is depicted. The reader must try to detect Pivot Points by himself.

•  Pivot Points in the intra-day trend;

•  Pivot Points in the weekly trend session.

This information is expedient. Due to it, one can understand the following facts (and make use of them).

1. one can detect the point at which the "bear" intra-day trend starts;

2. one can detect the point where the beginning of the "bear" weekly trend can be confirmed for sure.

3. On can see at what points the trend heavy (strong) corrections - or the trend recoil - could occur.

4. One can understand the conditions for the reversal of the trend and its changing from the "bear" type to the "bull" one. However, this has not happened in the case in question.

5. In addition, a trader must take into account the reversal point abolition (failure). Regarding this aspect, one could state in a deal for a long period.

Masterforex-V Trading Academy in English - http://www.masterforex-v.su

Masterforex-V Trading Academy in Russian - http://www.masterforex-v.org

Book 2 Chapter 4 Technical Levels at Forex, Presented by Dow Jones's Agency

For the work at Forex, every day each trader must detect technical levels of the resistance and support. As it is already mentioned in the previous chapters, detection of technical levels of the resistance and support is rather complicated. A trader (and the beginner especially) must clearly differ the levels of various currency pairs. Issuing from these criteria, one can project a commercial plan for the trading session and develop the daily working tactics.

I suppose that the most optimal technical levels are submitted by Axel Rudolph from Dow Jones Newswires agency.

There is an example of the technical levels on July 7, 2006.

According to the technical analysis given to European currency markets by Axel Rudolph from Dow Jones Newswires agency, USD will come down (drop) - see the moving charts made on July 7, 2006 for 24 hours.

EUR/USD; EUR/GBP; EUR/JPY; EUR/ SWISSI.

The 3^rd resistance! 1.2914 !0.6997 !148.12 !1.5766 !
The 2^nd resistance! 1.2842 !0.6988 !147.80 !1.5742 !
The 1^st resistance! 1.2789 !0.6968 !147.50 !1.5713 !
The point of reversal (pivot)! 1.2775 !0.6957 !147.15 !1.5699 !
The 1^st support!1.2758 !0.6942 !146.96 !1.5689 !
The 2^nd support! 1.2730 !0.6920 !146.55 !1.5669 !
The 3^rd support! 1.2685 !0.6913 !146.20 !1.5650 !
Let us examine EUR/USD pair movement during the day. The pair aims at the minor (accessory) resistance at the level 1.2789 (it is Fibonacci correction level by 61.8%). If this level will be broken through, the pair will reach the point 1.2842. For this pair, the 1^st level of support is located at the level 1.2758 (the minimum on Sunday). If, on the contrary to expectations, this level will be broken through, the pair can "test for strength" the minor (accessory, second-order) support at the level 1.2730.

In the weekly Chart ??, EUR/USD pair movement is depicted. It is an ascending trend.

EUR/GBP pair movement is presented in the daily Chart ??. One can expect the pair to reach (arrive at) the secondary resistance at the level 0.6968. If this level will be broken through, the pair will aim at the resistance at the point 0.6988. The 1^st level of support is located at 0.6942. If this level of support will not resists (stand up), the currency pair will aim at the level support at 0.6920.

In the weekly chart ?? , one can see EUR/GBP pair movement. It is an ascending trend.

EUR/JPY pair movement is depicted in the daily chart??. This pair aims at the minor (accessory) resistance at 147.50 - until the 1^st support at 146.96 is not broken through (the daily minimum on Tuesday). Exceeding the value of 147.50, the pair will aim at the minor (accessory) resistance at 147.80. Below 146.96, the levels of support are 146.55 and 146.20.

EUR/JPY pair movement is depicted in the weekly chart ??. It is an ascending trend.

Further, EUR/SWISSI pair movement is depicted in the daily chart. The pair again "puts on trial" the minor (accessory) resistance at the level 1.5713 (it is the maximum in the given medium). If this level will be broken through, this pair will "test for durability" the resistance at the level 1.5742. The 1^st support is located at the level 1.5689. The next one is placed at 1.5669 (the minimal value on the Thursday morning).

There is EUR/SWISSI pair movement depicted in the weekly chart. It is the ascending trend.

And now we regard with the following currency pairs:

GBP/USD; USD/JPY; USD/SWISSI; Aussie dollar/USD.

The 3^rd resistance!1.8496 !116.67 !1.2446 !0.7510 !

The 2^nd resistance! 1.8475 !116.01 !1.2396 !0.7503 !
The 1 ^st resistance! .!1.8415 !115.84 !1.2364 !0.7481 !
The point of reversal! 1.8370 !115.20 !1.2292 !0.7464!

The 1^st support! 1.8320 !115.02 !1.2262 !0.7449 !
The 2^nd support! 1.8270 !114.34 !1.2197 !0.7439 !
The 3^rd support! !1.8200 !114.00 !1.2135 !0.7405 !
Let us examine GBP/USD pair movement during that day. The pair aims at the minor (accessory) resistance at the level 1.8415. If this level will be broken through, the pair will aim at the point 1.8475. For this currency pair, the minor (accessory) support is located at the level 1.8320 (the maximum on June 23). The next level of support makes 1.8270 (the maximum on June 27).

There is GBP/USD pair movement depicted in the weekly chart. Is it the recoil from the level of support?

Let us examine USD/JPY pair movement during a day. The currency pair is descending again, aiming at the minor (accessory) support at 115.02. If this level will be broken through, the currency pair will aim at the level of support at 114.34. The first resistance is located at 115.84 (the maximum in the medium).

We now dwell on USD/JPY pair weekly movement. The increase is hampered by the resistance level.

Let us examine the daily chart of USD/SWISSI movement. One can expect the pair to descend down to the minor (accessory) support at 1.2262, till the growth will be restricted by the resistance at 1.2364. If this level of resistance will be broken through, an increase in this currency pair on Friday can restrict the minor (accessory) resistance at 1.2396. The support is located at 1.2197, which is lower than the level 1.2262 (the minimum in the medium).

Again, one can study USD/SWISSI pair movement, depicted in the weekly chart. The increase is hampered by the level of resistance.

There is Aussie dollar /USD pair movement depicted in the daily chart. This pair aims at the minor (accessory) resistance at 0.7481. If this level will be broken through, this pair will aim at the marks 0.7503 and 0.7510. These points are the maximums on June 9 and June 12, respectively. The 1^st minor (accessory) support is located at the level 0.7449 (the minimum on the Friday morning). This level of support must hold out ("survive") if the currency pair tests this level for strength (durability). If this level will be broken through, the minor (accessory) support at 0.7339 will hamper the decay of this currency pair.

There is Aussie dollar /USD pair movement depicted in the weekly chart. One can see the recoil from the level of support.

The point of recoil (U-turn, pivot) is equal to the sum of the maximal and minimal prices of the bargain closing at the previous day, divided by three.

Students of Masterforex Trading Academy have developed an indicator - Pivot RS session. It is intended for saving time that could be spent on daily marking points of recoil (U-turn, pivot) and 3 levels of the resistance and support (see the levels of the resistance and support by Axel RS - http://forum.masterforex-v.org/index.php?showforum=24.

Chart 2.3.1

Chart2.3.2

Chart 2.3.3.

Chart 2.3.4.

Chart 2.3.5.

We now dwell on the advantages of the technical analysis given by Axel Rudolph to Forex market.

1.For a trader, it is so easily to see the reversal (pivot) point and 3 levels of resistance/ support as regards the 8 basic currency pairs at Forex. Surely, such approach economizes the time.

2.One should pay attention to Axel's analytical review title. The further currency movement at that very day must be taken into account as well. Rudolph Alex has clearly exposed the currency pair movement direction at the beginning of trading at Forex.

3.In the charts that concern June 7, 2006, one can watch how the ally currency pairs, located place beyond the pivot, have managed to break through the levels of resistance/ support ## 1, 2, 3. It is conditioned by decrease in USD rate.

4.Let us dwell on the possibility of gaining profit at Forex. As one can judge by the above-given examples, a trader can gain profit with the currency pair movement to start from the 1^st and up to the 3^rd level of support/resistance.

The comments. The reader should pay attention to dispute between Masterforex-V Trading Academy students and a leader of Forex Brokers Forex Club. This Forex Brokers, every day issuing Dow Jones Newswires, somehow manages to keep on "forgetting" to submit the analytical reviews that contain Rudolph Alex's levels to its traders. Only students of Masterforex-V Trading Academy have made one of the largest Forex Brokers of Forex club in Russia to include Rudolph Axel's analytical investigations into Dow Jones Newswires for the traders.

We now dwell on drawbacks of technical levels at Forex, submitted by Dow Jones's agency.

1.  Any system cannot be reliable if one does not understand the essence of it. So, what one can do when Axel's levels would be not issued tomorrow. Otherwise, R. Axel can be mistaken.

2.  How one can on one's own detect R. Axel's levels in several hours before the news publication.

3.  How one can manage to know the levels of resistance/support in half of an hour earlier than R. Axel would publish it? By the way, students of Masterforex-V Trading Academy somehow do get this information earlier than it appears in Dow Jones Newswires (news line), issued by leading Forex Brokers in Russia?

4.  You can calculate the currency pair pivot (the point of reversal) according to the following technique: "the point of reversal is equal to the sum of the maximum, minimum and the price of closing at the previous day, divided by three". However, this point will never coincide with the value, which R. Axel would submit you the next morning. Is not it true? How to calculate the pivot so that to make both these values to coincide?

5.  Which other techniques can be used in order to check the correctness of R. Axel's levels. For instance, on July 7, 2006 the fourth level of resistance for the EUR/GBP pair was calculated before the issue of news. It made the local peak in American session. (GBP was at 1.8540; EUR was at 1.2860).

There is another example. On July 10, 2006 R. Axel has pointed out to the 3^rd level of support of GBP as 1.8415. At the same time, the majority of participants of Masterforex-V Trading Academy closed their bargains at 1.8365 - it was the local minimum on that very day (July 10, 2006). How one can detect a local minimum of the trading day with the accuracy up to 1 point in the first half of the trading session when GBP has moved through 160 points?

Chart 2.3.8.

Aiming at gaining profits regularly, students of Masterforex-V Trading Academy study such specificities. Surely, the detection of pivot point and the 3-4 levels of resistance/support is necessary for gaining profits regularly. However, the knowledge just of this method is not enough.

Masterforex-V Trading Academy in English - http://www.masterforex-v.su

Masterforex-V Trading Academy in Russian - http://www.masterforex-v.org

Book 2 Chapter 3 The true and false breakouts of the levels of resistance and support.

Recoil from the technical level.

In its essence, this part is dedicated to the following.

1.  To scrutinize the "classicists" of Forex approach to the problem of determining the difference between true and false technical level breakouts.

2.  To expose drawbacks, inherent in each of the "classical systems", which cause traders' losses at Forex.

3.  By giving analysis to these problems, to elaborate methods of their solution.

One can describe the today's state of the technical level analysis at Forex as the following.

1.  A unified method of detecting technical levels at Forex is not elaborated yet (see the Part "Levels of support and resistance" in Masterforex-V TS.

2.  A technique that could permit us to estimate whether the breakout is true or false still is not developed as well.

One can mark out the two types of the currency pair movement at Forex :

a). There can happen the true (real) breakout through the technical level, after which a currency pair is moving towards the next level.

b). On the other hand, a recoil from the technical level, a false breakout included, is possible.

For the trader's work, the following aspects are important.

1.  There exists a flat - i.e., a lateral trend between the first levels of the resistance and support. When a currency gets into this price corridor, its further movement direction is uncertain.

2.  By definition, the trend is the directed movement of currency pairs as the result of the true (real) breakout of the flat technical level.

a). If the currency pair movement is directed upwards, it is the breakout through the 1^st level of resistance ( the breakout upwards).

b). If the currency pair movement is directed downwards, it is the breakout through the level of support (the breakout downwards).

It is clearly depicted in the charts given below.

Chart 2.1. The false breakoutthrough the level of resistance and return to the flat zone.

Chart 2.2. The true breakout of the level of support and the beginning of the "bear" trend.

There are the rules that a trader must observe.

1.  Under the conditions of the flat: a) Either to be out of the market (especially if the trend range is narrower than the average statistical stock reserve (cruising range) for a given currency pair per the trading session). b). Otherwise, one can work with the recoil - i.e., to make deals on "buy" from level of support and on "sell" from level of resistance under the condition of the flat broad ranges, approximately equal to the average statistical stock reserve (cruising range) for a given currency pair per the trading session.

2.  Within the trend, I would recommend to work only towards its direction ("a trend is my friend").

3.  The true breakout through the technical level indicates the beginning of a trend. A). That is, if it is the breakout through the level of resistance, the "bull" trend is beginning. B). Otherwise, if it is the breakout through the level of support, the "bear" trend is developing.

4.  The trend development (course) is the directed movement from one level of resistance/support to another. It is depicted in Chart 2.2. After breaking through the 1^st level of support, the currency is rushing from one level to another - till the recoil. It means the non-breaking through any of the next levels or the false breakout through one of them. In Chart .2.2, the false breakout through the 3^rd level of support (the flat) is depicted as well. It indicates that the given trend movement is temporally arrested or it has come to the end.

5.  The trend wave attenuation (the end of it) is the trend directed movement turning into the lateral movement (flat). The flat is characterized by non-breaking through a level of resistance/support or the false breakout (the recoil). In Chart.2.2, one can see the false breakout through the level of support #3.

6.  The market is under the conditions of the non-stop movement. Therefore, in a trading session, the trend end in the form of a flat makes the starting point of the trend further development. It is depicted in Chart 2.2 - between the levels of support ##2 and 3. As it is shown in Chart 2.3, the support #2 turns into the resistance #1.A local minimum turns into the support #1. Hence, the next trading session can be still carried out under the conditions of a flat, the levels of support/resistance being strictly determined. Otherwise, the ex-support #2, after breaking through the resistance #1, can open the "bull" trend. Respectively, if the support will be broken through, the "bear" trend will start.

Chart 2.3. The levels of resistance and support.

Thus, all rules that can guarantee the profitable practice at Forex can be briefly formulated as the following.

•  One must understand ("feel") the difference between the levels of support and resistance (see the previous part).

•  One must know the rules of the true breakout through the levels and recoil from them, the false breakout included.

•  One must watch the correlation between the flat and the trend in various timeframes (TF).

Comments. As one can see, the above-given rules that concern the flat-trend correlation are rather simple. Hence, there arises the following question. Why do more than 95% of traders, who know these rules, lose at Forex?

The answer is evident. That is, one must perfectly distinct the true breakout through the technical level from a false one.

•  When the technical level breakout is true, one must open a deal in the direction of the trend commenced.

• When the technical level breakout is false, one must open a deal towards the opposite direction.

It is so simple (evident), isn't it? It is just necessary to clearly distinct (tell) the true breakout signs from the false ones.

We now examine how the difference between the true and false breakouts through the technical levels is explained by the "classicists" of Forex.

Generally speaking, the "classicists" state the following. The true breakout, in contrast to the false one, occurs when the trading volume is increasing. In the case of the false breakout, the trading volume does not increase.

In "Exchange trade basis", Alexander Elder states the following. While opening a deal on "buy", the best situation is when the breakout upwards in the day chart would be confirmed by the technical indices that could indicate the formation of a new upwards-trend beginning in the weekly chart. Larger trading volumes are inherent in the true breakouts. On the opposite, as a rule, false breakouts are characterized by small trading volumes. In addition, when the breakout is true, the technical indices reach new maximum/minimum values towards the direction of the trend development. The false breakout is often characterized by the divergence between prices and indices.

A certain price corridor is more inherent in the market than a trend. The majority of breakouts through the price corridor bounds are false. Such breakouts can involve into the game a gambler who follows the trend- earlier than the prices return to the standard. The false breakout is the amateur's plague. At the same time, professionals adore such false breakouts.

Neiman's viewpoint is the following. In their majority, false signals can be checked (detected) with the help of the volume indices. In the first (primal) currency movement towards the level of support/resistance, the trading volumes are increasing. At the last stage in currency movement towards the level of support/resistance, such volumes are diminishing. That is, at the beginning of this reversal figure development, the volume is increasing due to the trend previous price movement. When the figure development is coming to the end, the volume is increasing due to the price movement in the direction, opposite to the previous trend. It is the sign that nobody is interested in prolonging the old trend. In a chart, it can be depicted as follows:

Chart 2.4.

L. Borcelino in his "Manual of de-trading" (see http://forum.masterforex-v.org/viewforum.php?f=9) presents another characteristic of the double peak/minimum. The second peak/minimum is formed with a trading volume smaller than the first one. In fact, the second peak/minimum cannot be as high/deep as the first one. Nevertheless, it is the repeated attempt at moving towards the same direction. And what is more, such double peaks/minimums can develop their 3^rd , 4^th, etc. waves (versions). Such double/triple peaks/minimums can be formed within a short period - as well as during a much longer time interval - from several minutes and up to ten years.

In contrast to the false breakout, the true one is characterized by the trading day closing above the technical level breakout. This position must be hold up not less than during 2 days.

J. Murphy in his "Technical analysis of future markets" also investigated the problem of criteria of the true breakout through the trend line. It is not a simple problem. In detecting such criteria, subjectivity of a kind is unavoidable. As a rule, the trend line breakout via the price of closing of bargain (deal) is more important than just a breakout within a day.

* There are price filters. They condition (prescribe) that the trend line must be broken through by a certain value. In addition, there exist time filters. Among them, the most commonly used is the so-called the rule of two days.

In contrast to the false breakout, the true one is characterized by the trading day closing behind (above) the technical level broken through. This position must be hold up not less than during 5 days.

In his "Technical analysis. The full course", D. Swagger studied the problem of signs of a true/false breakout. According to him, the following situation is rather common (ordinary). Prices just slightly deviate from the original trading range and only for several days. Later on they return back. One of the reasons of such pattern is the following. The market participants want to safeguard (insure) themselves against the heavy movement in prices after the trading range breakout. Therefore, they issue protective stop-orders in the vicinity to the trading range. The result can be the following. Sometimes even an inessential movement in prices towards the outwards of the trading range can stimulate (provoke) realization of a considerable number of the protective stop-orders. As soon as this primary flow of orders is saturated, the breakout comes to an end - if it is not strengthened by fundamental reasons and support purchases. Otherwise, the breakout can sustain if there are large deals on "sell" in the case of the breakout through the lowest bound (bottom). Such sells can fortify (strengthen) this tendency. One must take into account such specificities in the price behavior. As an indicator of the tendency beginning, the trading range breakout probability is much higher if the prices still remain beyond the range after several days - e.g., after 5 days.

When waiting for the confirmation of the breakout, one can partially miss the profit per several days at the beginning of the tendency. All the same, this tactics helps eliminating many false signals.

In contrast to the false breakout, the true one is characterized by overcoming of the 3%- movement behind (above) the technical level broken through.

According to J. Murphy, sometimes even the breakout with the price of closing is not enough to be sure that the true breakout through the trend line has happened. To exclude false signals, the majority of analysts use various time- and price filters. The 3%-breakout makes an example of a price filter. Mainly this criterion is used for estimating a long-term trend line breakout. The price of closing must leave the trend line not less than by 3%. However, this rule is unacceptable to some financial futures - e.g., to deals with interest rates.

D. Swagger mentions that other signs of the confirmation can be used - such as the minimum percentage change in the price.

T. Chand has studied the channel breakout (see "On the other side of the technical analysis" - 1997). His rule of entering is the following. If the today's closing is higher than the maximum price in the last 20 days, one must buy at the closing. In the case of the downward position, one must sell at the closing. Going out of a long deal must be realized at a new 5-days minimum or with the stop-loss. Going out of a short deal must be realized at a new 5-days maximum or with the stop-loss. The stop-loss makes $1500. This is a typical trend-following system.

In "Encyclopedia of trading strategies", D. Cats and D. McCormick examined breakouts on the basis of prices of closing.

The test #1 is based on the channel breakout. In this system only the prices of closing are used. Here one does not take into account the entrance with the market price into the stock exchange tomorrow's opening and the deal costs (the commission (brokerage) and slip). In this system, the rules are the following.

If a current position is short or neutral and market price is higher than the price of closing in the last n days, one must buy at the tomorrow's opening. On the contrary, if a current position is long or neutral and market price is lower than the minimum price of closing in the last n days, one must sell at the tomorrow's opening (open a short position). The only parameter is inherent in this system. It is n (the number of days under analysis).

Chart 2.5. The breakout of upper bounds of narrow trading ranges (GBP; September, 1990).

Under the condition of a heavy trend movement, a deal may be opened even after 5(?!) days. This case is hardly can be contested.

However, what must be done in the other situation, examined by Swagger as an example of the analysis of another type.

Chart 2.6. The breakout of the previous minimum as a signal of "sell". Soybean oil. Continuous futures.

Chart 2.7. Support at the level of the previous relative maximum and resistance at the level of the previous relative minimum (DM, continuous futures).

How to correlate such recommendations given by Swagger with the principle of work on the breakout of the resistance/support level only on the 6^th (!) day?

We now dwell on the difference between breakouts through the resistance/support levels under the conditions of

• the strong signal (+++),

• the signal of intermediate strength (++),

• the weak signal (+).

It is the classification according to E. Neiman in his "The trader's small encyclopedia" (see http://forum.masterforex.org/viewforum.php?f=9).

I conventionally divide such signals into the three groups. It makes it easier to understand Neiman's approach towards determining the signal strength - and, respectively, to find out the strong and weak points of this theory.

A). Within the trend, the signal is strong (+++).

B). In the period of a flat, the signal is moderate (++).

C). In the direction opposite to that of the trend, the signal is weak (+).

These types of the signal are depicted in Chart 2.8.

Chart 2.8. The signal types.

The recoil from the level occurs, and the false breakout does happen more often than the true one. It is the work with recoils from each of the technical levels.

Again, let us return to "On the other side of the technical analysis" by T. Chand. He has examined the recoil (rolling-backsystem).

According to the old rule, the deal must be made on "buy" when the recoil is directed towards the support. Many traders like such situations. Really, the risk is minimal, whereas the potential profit could be rather high. On the contrary, one can buy in case of a strong trend and sell when the trend is weak. The key point consists in distinguishing the recoil from support.

The recoil is a slight correction of the trend. The recoil kinds can vary. For instance, one can determine the recoil as the currency movement in the last 3 days. Otherwise, it can be regarded as the approach to a moving average (MA). The latter can be considered as that of 20 or 50 days duration. It can be a simple or exponential one. All the same, the price can touch the average or cross it. The entrance into the 1%-band in the vicinity to this MA is also possible. After scrutinizing the conditions, one can decide where the "buy" could be profitable. For instance, it can be done at the tomorrow's opening, at the yesterday's maximum, or at the maximum chosen within 5 days. A lot of variations of this system can be developed in this way.

First, we will regard the recoil as a new minimum within 5 days under the condition of the upward-directed trend and new maximum within 5 days under the condition of the downward-directed trend.

Further, we must determine the notion of a trend. The minimum must remain above the 50-day simple MA, whereas the maximum must be below this MA.

Other versions are possible. A trend coming into the existence must be confirmed by ADX-14 exceeding 30. Otherwise, as an index of recoil, one can use RSI-14 or stochasticity. Getting into the critical zone, the reversal and leaving this critical zone make the signal.

In "Stock exchange secrets", L. Connors and L. Rushky state the following. In trading on the deviations (oscillations), the most appropriate model is the trading on the trial of the previous peaks (maximums or minimums). Such tests enable us to indicate the double breakpoint (rest-point, salient point). Thus, one can find a perfect position for opening a deal. Under such conditions, the risk of losses is minimal. The detection (test, probe) of a minimum, where the long-term position must be opened, can take place slightly higher or lower. All the same, the support cannot be established before the realization of the detection (test, probe). The majority of our models has become formed exactly after the successful detection (test, probe) - i.e., after the previous maximum/minimum approbation by the market and returning to this value again.

Chart 2.9. An example of the double breakpoint (rest-point, salient point).

T. DeMarque has examined the difference between the true and false breakouts through the technical levels. He has emphasized the importance of estimating whether the intra-day price breakouts are true. TD-points must be chosen correctly. TD-line must be plotted from the right to the left. The price guideposts must be calculated. After this, the three way-outs must be considered:

1.  There can appear the signs of the tendency reversal.

2.  A substantial shift in the correlation between the demand and proposal is possible.

3.  The price guidepost realization is important as well.

Besides, there is another factor, to which the attention should be paid. One must consider whether the intra-day price breakout is true. This is especially important. I regard my investigations in this area as a substantial contribution into improving of the technique of choice of a moment of entering the market - and leaving it. What is more, the given principles are applicable in other methods of the technical analysis as well. The following situation is rather typical. Traders take a position at points of the trend line breakout to-be. Than they with horror watch that prices stop and start to move in the opposite direction. This results in substantial losses. However, those very traders keep on doing the same mistake, not thinking about the origins of it. False breakouts are always rather frequent. It is trader's stumbling block, because of which some of traders totally refuse to use the trend line. A techniques of developing TD-lines has somewhat improved this situation. Nevertheless, false breakouts do happen. As far as I know, a technique of estimating whether the breakout is false or true is not developed yet.

We now dwell on the breakout qualifiers.

TD-qualifier of the breakout #1.

The signal of "buy" is true if the price of closing has decreased the day before the signal arrival.

The signal of "sell" is true if the price of closing has increased the day before the signal arrival

TD-qualifier of the breakout #2.

The signal of "buy" is true if the price of opening is higher than the price of breakout.

The signal of "sell" is true if the price of opening is lower than the price of breakout.

TD-qualifier of the breakout #3.

The signal of "buy" is true if the price of closing on the eve of the breakout, summed up with the difference between the price of closing and the minimum price in the same day (or the price of closing the two days before the breakout if it is lower) is lower than the price of breakout.

The signal of "sell" is true if the difference between the price of closing on the eve of breakout and the difference between the maximal prices of closing in the same day (or the price of closing the two days before the breakout if it is higher) exceeds the price of breakout.

I have discovered three TD Breakout Qualifiers. There are two price models, formed the day before the probable breakout. In addition, there is one model, which is formed in the day of breakout. In particular, I have drawn the following conclusion. If a market is in the state of oversell (overbuy) the day before the breakout, there increases the possibility that the amount (pressure) of buyers (sellers) all the same will not become diminished after the breakout. This makes just illusion of the market strength (weakness).

Giving analysis to the price behavior on the eve of breakout, I have discovered the following. If the price of closing on the eve of breakout upwards is lower than in the previous day, the probability of the true intra-day breakout increases.

In this case, it can be recommended to open a position in the intra-day intersection (crossing) of the trend line. I determine this as TD Breakout Qualifier #1 (see Chart 1.37 ??).

In a way, TD Breakout Qualifier #3 is similar to TD Breakout Qualifier #1. Really, it also takes into account the price movement on the eve of the trend line breakout. However, in the case of TD Breakout Qualifier #3 one determines the difference between the maximum price and the price of closing on the eve of the trend line breakout downwards. Further this difference is subtracted from that very price of closing. It is the method of calculating the supply value. The demand value is calculated in the following way. The difference between the price of closing and the minimum price on the eve of the trend line breakout upwards is added tothat very price of closing (see Charts 2.10, 2.11 (143 and 144)).

Chart 2.10 (143).

The true breakout can be detected in the following way. One must find the difference between the price of closing on the eve the breakout upwards and the minimum price in that very day (or the price of closing in the previous day - if it is lower). Further it is necessary to add this difference to the price of closing in the day before the breakout. If the value obtained is lower than the price at the point of breakout, the breakout is considered true. If the value obtained is larger than the price at the point of breakout - most probably, the breakout is false

In the given example (see Chart ??), the difference between the price of closing and the minimum price on the eve of the breakout of TD-line of supply (A-B) is added to the price of closing in that very day. The value obtained is smaller than the price at the point of breakout. Consequently, the trend line breakout is true. In this chart TD-line of demand (A'-B') is also drawn (plotted).

In Chart (145??), for determining whether the trend line breakout downwards is true, the use is made of the procedure, the sense of which is reversed with respect to the above-described one.

Chart 2.11 (144).

First, one has to determine the difference between the price of closing and the price minimal on the eve of the supply line breakout upwards (A-B). Further, the price of closing in the same very day must be added to this difference. As one can see, the resulting value is smaller than the price at the breakout point. This confirms that the breakout is true.

Chart 2.12

The principal drawbacks of the "classical" theory of distinguishing the true and false breakouts of technical levels at Forex from the viewpoint of Masterforex-V TS.

Such drawbacks are the following.

1.  The "classical" theory of the true and false breakouts of technical levels was developed not issuing from conditions of Forex money-market (where the trading volume was not taken into account). Some other markets were considered.

2.  Even T. DeMarque has recognized that this approach is incorrect in total. This classicist has admitted the following. As far as he is concerned, he still doesn't know any technique that could permit traders to see whether the price breakout is true or false.

One can judge by oneself.

Really, it is evident that the deal opening directly after the previous day technical level breakout must be specified much more exactly. E. Neiman doesn't write about this aspect directly. However, his approach to the order opening is based on the conviction that a given breakout must happen along the trend development direction. This approach must be scrutinized much more closely. The reason is that the one of the keystone figures of reversal (such as either "the head and shoulders", or "the head and shoulders reversed") is purely the result of (exactly indicates) a local peak breakout of the previous day.

Some traders try "to play safe". Avoiding not getting into the "head and shoulders" figure, they open deals after 5 (!) days to start from the technical level breakout. In this connection, there arise the following questions.

Surely, one could give analysis to broad markets post factum. In this case, one can choose heavy trends of the duration within 30-70 days or longer (as Swagger did it). Thus, one can recommend traders to open their deals in the 6^th day to start from the technical level breakout.

However, what's about the real trading? Under such conditions, a trader does not know the trend actual duration. For instance, see Chart ?? GBP/USD pair movement on June 30, 2006 can serve as an example. The support at 1.8000 has been broken through. After waiting for 5 days, one could open a deal in the vicinity to 1.7560 at the 6^th day - i.e., after the currency has already advanced more than the half-way in its movement (by 440 points!). Now one could expect a local minimum at 1.7310 - to be more precise, at 1.7435. Exactly at this point, after the breakout thorough the previous day maximum, the currency has reversed.

Chart 2. 12 (??).

Thus, making use of the technique by Swagger one can gain just 125 points under the conditions of a strong trend (690 points). However, one must keep in mind that the reversal could happen earlier. That is, one losed 500 point in order to dogmatically stick to the rule "not to open a deal during the first 5 days after the level breakout". As the result, a deal will be opened at the end of the currency movement or before the recoil. When a dogma does not correspond to the practice any more, it would be better to decline (reject) it, would not it?

We now dwell on the recoil system according to T. Chand in his book "On the other side of the technical analysis). Notwithstanding all the positive aspects of this system, a very serious drawback is inherent in it. That is, within the framework of this system one cannot detect a point at which the recoil turns into the reversal.

The theory of the level breakout, developed by D. Cats and D. McCormick in "Encyclopedia of trading strategies", must be revised (specified) from the viewpoint of (with respect to) the price of closing in the previous day. That is, one can give hundreds of examples when the work according to the given technique is profitable at Forex. At the same time, there are also hundreds of disadvantageous situations - e.g., the breakout through a local peak in the previous day can result either in the reversal or in a very heavy recoil towards the direction, opposite to the level breakout.

In the framework of the classical analysis given to Forex, the notions of technical levels of resistance/support of tilted (slant) and horizontal channels are not clearly defined - they are just "piled up". Hence, how can one tell the difference between these characteristics from those the features in common?

Elder was the first who attracted attention to the following problem. How to elaborate one's position in all the mess of true and false breakouts, trends and flats in different time frames?

The currency pair movement may be divided as following.

a)  trend waves;

b)  trend recoils;

c)  a flat.

After this, all possible combinations of these three characteristics must be put on trial in various time-frames at least at 3 screens - as A. Elder has recommended.

It is necessary to calculate the number of combinations. For instance, there is the combination #1. That is, the trend is in the minimal timeframe, whereas the flat is in the large-scale timeframe.

At what points it must be determined whereas level breakouts are false or true?

Is it enough to use three screens (displays) according to Elder? Maybe more screens would be preferable.

As far as I'm concerned, I work with 4 screens. What are the drawbacks and advantages of the given technique?

How different timeframes are correlated with one another under the following condition. That is, at one's point-of-sale terminal, there are 4 screens. However, one must take into account the quantity of timeframes much larger.

What is the correlation between the technical levels of resistance and those of support, all of them being exposed at 4 screens?

In what way do the fundamental and technical analyses supplement each other? How can a trader make use of the fundamental analysis from the viewpoint of its applying in the branch of the technical analysis, the problems of which are enumerated above?

Masterforex-V Trading Academy in English - http://www.masterforex-v.su

Masterforex-V Trading Academy in Russian - http://www.masterforex-v.org

BOOK II Chapter II SUPPORT AND RESISTANCE LEVELS IN MASTERFOREX-V

Support and resistance are the known cornerstones in forex technicals, wherein:

1. a current forex rate (CFR) is surrounded by levels of:

a). resistance being superior to CFR;

b). support being inferior to CFR.

2. a level breakthrough triggers a leap to a consecutive support/resistance;

3. a false breakthrough is responsible for a rate backstroke (say, from resistance to support).

Thus, having data on resistance and support levels and being armed with R/S true/false criteria, a trader grows faultless-entry skilled to ensure smooth level-to-level trading.

To be found below is a graphic drawing of a flat followed by an R/S up/down breakthrough.

Fig.1

In actual sample GBPUSD trade dated January, 31, 2006 the support breakthrough has triggered a bullish in-session trend.

Simple, isn't it? Affirmative at a glance, but 95% of traders loosing their forex deposits are calling for natural questions:

1. What's the reason, the world traders are getting entangled in so a seemingly simple regularity?

2. What's the way of correct detection of R/S levels for currencies to use to jet off from?

3. What attributes are inherent to true/false breach differentiation?

It is, thus, to be concluded that a trader will never achieve steady FX gains unless the answer is found to the above three simple questions.

CLASSICAL BOOKS ON RESISTANCE AND SUPPORT LEVELS

Forex scholars' books, when analyzed, are giving grounds why 95% of traders turn deposit-killers. The point is that under different technical scholars:

a). fairly different understanding is being attached to support and resistance;

b). no distinct criteria (except Demark's technique) is in service to finding a support and a resistance;

c). there is no clear-cut interfacing between R/S levels on different timeframes.

Below is sort of understanding classification:

1. R/S are understood by SOME SCHOLARS to be horizontal lines drawn along price highs and lows

a). For A. ELDER (view: "Basics of exchange trading" http://forum.masterforex-v.org/viewforum.php?f=9 ):

support and resistance are horizontal (or almost horizontal) lines linking several minima

(maxima).

Fig.2. Support and resistance

Legend<: - английский фунт = GBP

- поддержка = support

- сопротивление - resistance

b). J. MURPHY also indicates that "points 2 and 4 represent uptrend support levels. The figure depicts uprising support and resistance under an uptrend with points 2 and 4 being support levels which use to be coincident with earlier lows. Points 1 and 3 indicate resistance levels, which use to be coincident with earlier highs" (see: "Technical analysis of the Futures Markets" http://forum.masterforex-v.org/viewforum.php?f=9 ).

Fig. 3a and 3b. Uptrend and downtrend support-resistance levels

2. SOME SCHOLARS believe support-resistance to be sloped lines drawn along price highs and lows (trendlines, actually) as below:

Fig. 4. Trendline-fahion support-resistance pattern

a). T. DEMARK

Fig. 5. Bid pivot points (TD-points) building up a resistance level

The TD-points are peculiar of price values being not exceeded within 2 adjacent days. The points are specially emphasized on the chart.

Note that the price movement above the TD-line is mirrored by same after the downbreak of this line.

Price projection Z is made by way of the following calculation:

- difference is taken between Y being maximum price above the TD-line and X being special price immediately below the TD-line;

- the obtained value is subtracted from A-B line breakthrough price.

b). L. BORCELINO is also a user of inclined lines as support/resistance (view: "Manual of Daytrad-ing" http://forum.masterforex-v.org/viewforum.php?f=9).

Fig. 6. Quoting L. Borcelino: "As evident form these examples, trendlines, drawn across preceding highs and lows, constitute perspective support and resistance projection".

3. E. NAYMAN'S combined commitment of inclined and horizontal R/S levels (view: "Trader's Minor Encyclopedia http://forum.masterforex-v.org/viewforum.php?f=9):

"A resistance line connects market important maximums (highs, peaks)", And further on: "R/S lines drawing should be preferably done through price concentration areas, rather than through highs/lows extremes" (???).

Per minimum price trendline (a support):

Fig. 7

Example of E. Nayman using resistance/support levels at trade station:

Fig. 8

4. MOVING AVERAGES based resistance/support levels.

a). E. NAYMAN: "Bollinger Bands are sort of peculiar support/resistance lines

Fig. 9

5. ROUND NUMBERS being support/resistance levels

a). E. LEFEVRE (view: "Memories of an Exchange Profiteer" http://forum.masterforex-v.org/viewforum.php?f=9) underlined: "Rates, having, for the first time, traveled 100, 200 or 300 points, are almost sure to cover additional 30 to 50 pips"

b). D. SCHWAGGER: "One is to be especially cautious about dollar holdups. With USD781,25 best working on T-bonds and USD425 - on soybeans, temptation is raising to find "optimum" holdup for each market. It is advantageous to establish a round number to comfortably use it all of the markets.

CLASSIFICATION OF WEAK AND STRONG R/S LEVELS AS VIEWED BY FOREX SCHOLARS

J. MURPHY classifies support and resistance (view "Technical Analysis of Futures Markets", New York Institute of Finance и Prentice Hall, 1986) proceeding from: price in-domain residence period (1); volume of trade (2) and price domain age (3).

1.  The longer the price reciprocation period within a certain support/resistance area, the more critical the area. By way of an example, if a certain stagnation area observed a 3-week price up/down movement with subsequent rally thereof, this support domain is more important than that having observed a 3-day price reciprocation.

2.  Volume of trade is another means to evaluate importance of support/resistance. If, say, a support formation did involve a huge volume of trade, it means a huge number of contracts passing from hands to hands, hence the support levels is ranking high and visa versa: the less the volume of trade, the lower-ranking the support.

3.  Still another support/resistance importance indicator is its age in relation to the present moment. Since we are dealing with traders' reaction to market moves and to positions they have entered or have failed to enter, it is fairly clear, that the younger the event and the reaction thereto, the more important the event.

Seven years later (in 1993), A. ELDER has confirmed 2 of 3 J. Murphy's postulates dated back to 1986. His classification of resistance/support levels is guided by:

- number of test tangencies it sustained (the greater the number - the stronger the level). Within a fortnight an immediate support/resistance is formed; within 2 months the level grows accustomed to by traders, thus attaining medium power; within 2 years actually a stereotype is built radiating strong support and resistance.

- price scatter dominating a support/resistance level (the wider the range thereof - the stronger the level). A wide-range turning-point price consolidation is similar to a high fence surrounding valuable property. A congestion zone equal to 1 % of current price (4 points with S&P500 at 400 level) yields insignificant support/resistance, whereas a 3% area is responsible for medium levels with a 7% area possessing sufficient power to be a strong trend killer.

- The greater the volume of trade in a support/resistance area, the stronger the levels. Huge volume within a congestion zone is indicative of numerous emotional jobbers' involvement. As opposite, minor volumes point out traders' indifference towards the level being intersected, hence being attribute of the level's deteriorated health.

Weak support/resistance levels are capable of bringing a trend to a halt, while strong ones may appear trend reversers. Traders buy support and sell resistance, thus turning their impact into a self-justifying projection.

SCHOLARS' VIEW ON SUPPORT/RESISTANCE SEATING POINTS

1. T. DEMARK recommends:

- plotting resistance upon bid TD-points

- plotting support upon ask TD-points.

2. D. SCHWAGER (view: "Technical Analysis. Complete Course") insists on drawing resistance and support "in the vicinity" of prior lows and highs.

"Support and resistance are to be viewed as approximate areas rather, than exact levels. It is to be emphasized that any previous high is not at all a premonition of perspective prices dry up thereat or thereunder. Instead, it is indicative of a resistance to be expected near that level. By analogy, a previous low is not at all illustrative of further price declines halting thereat or thereabove. Instead, it is indicative of a support to be projected close to that level.

Depicted below is a support zone governed by relative prior highs and lows concentration: gold, futures.

Fig. 10.

Continued by D. Schwager: "Some technical analysts use to treat previous highs and lows as being endowed with, sort of, holy significance. A previous high, being 1078, is deemed by them a strong resistance. In case the market displays a spike higher, say, as far as 1085, they reason the resistance to have been breached. It's not correct. Support and resistance are but to be looked upon as cloud-shaped areas rather than exact levels."

3. J. MURPHY resorts to plotting support and resistance in a local peak-wise fashion (i.e. by local highs and lows): "A resistance level usually coincides with the previous peak level".

Fig. 11.

Fig. 12.

4. A. ELDER: "Resistance and support are to be preferably plotted (see Fig. 13) through congestion zone margins (CZM) rather than through highs and lows. CZMs constitute traders' mind-changing areas, whereas highs and lows are only reflective of panic among weakest jobbers".

Fig.13.

Continued by A. Elder: "Beware of support/resistance false breaching, indicated as "F" in the above figure. Breaches are followed by amateurs, with professionals being opposite travel jobbers. Now, pay some attention to the chart's right corner, where prices have bumped into strong resistance. It's high time to hunt for shorting with a stop-loss to be placed slightly above the resistance level".

To be noted is a pronounced regularity, not referred to by A. Elder: the support/resistance levels drawn through previous local peaks are not extended by him after false breaching thereof.

4. D. SCHWAGER gives the following explanation when resorting to projection of 2 (!) inclined support and resistance levels:

- "Standard lines are usually drawn through price extrema (highs, lows), attributable to traders' emotions, therefore these points may not reflect the market's real trend".

- "An inner trendline is to be plotted closest to the bulk of relative lows and relative highs, ignoring extreme points"

D. Schwager himself is the recognizer of the subjective nature inner trendline method, but in so doing he jumps to a very important conclusion that ordinary trendlines are:

- similarly subjective (!);

- far less helpful (!), than inner trendlines.

"One of inner trendlines' shortcomings is their inevitably random nature, even greater than that possessed by ordinary trendlines, being restricted by extreme highs and lows, at least".

"In practice, not infrequently, several options prove available as regards inner trendline plotting procedure (see Fig. 14). Nevertheless, my experience advises inner trendlines to be of greater avail than ordinary trendlines when spotting potential support/resistance areas".

BRIEF CONCLUSIONS:

1. Each forex scholar offers his own interpretation of support/resistance levels, meaning different entities thereby (inclined, horizontal, inclined-horizontal, MA-based, round numbers-based, etc.).

2. There exists no clear-cut technique to define points to plot support/resistance levels through (except that of Demark's).

3. In real time trading, that said, these levels discovery on forex charts automatically entails absolutely different conclusions.

Fig. 14.

Legend: - обычная линия тренда = ordinary trendline;

- внутренняя линия тренда = inner trendline.

TESTING AND PRACTICAL INCONSISTENCY OF CLASSICAL SUPPORT/RESISTANCE DETECTION METHODS

Jeffry Owen Katz and Donna L. McCormick have disclosed results of their testing of the above scholars' recommendation procedures in their "Encyclopedia of Trading Strategies":

TEST PROCEDURE 2

A channel breakthrough-operated system. Closing prices are utilized only; next day market price entry at session opening; commission and slippage being accounted for.

The above test has been performed exactly the way the previous one, but with no account to slippage (3 ticks) and commission (USD15 per dealing cycle). Although the model displayed perfect operation with no account to dealing expenditures, it has turned out a complete fiasco in practice.

Even the best-in-sample solution has proved loss-responsible only, and, as expected, the system's beyond-sampling poor operation came into being.

Note: In compliance with E. Nayman's theoretical outlook, a channel upward breach is alleged to be a STRONG (!!!) trading signal at an uptrend.

TEST PROCEDURE 6

It is a closing price breakthrough system with next day per stop-order entry. The model longs via a stop-order at the point of breaching a resistance appointed by recent highs and shorts via a stop-order at the point of breaching a resistance appointed by recent lows.

As expected, the system exhibited much poorer operation with low profit and deteriorated statistics within sampling. The model proved killer to the per-deal average of USD798, with profit rating being 37%.

TEST PROCEDURE 7

The procedure involved volatility punch with next-day opening entry. The model longs upon next-day opening with provision that today's closing appears superior to the volatility upper edge. The model shorts in case of the price falling below the above edge.

The optimization period embraced 240 dealings only with 45% being profit-bringing.

TEST PROCEDURE 9

Involved is volatility punch triggering a per stop-order entry. The model effects a market stop-order entry immediately after passing a breach point.

The sampling period incorporated 1465 dealings, each being of 6-day average duration. The system has ensured 40% profit with average gain of USD931 each. Under all parameter combinations only longs were winning. Both shorts and longs proved loosing outside sampling limits. Only 29% were winning out of the total of 610 dealings.

BRIEF CONCLUSIONS:

Testing data, supplied by Jeffry Owen Katz and Donna L. McCormick, constitute convincing grounds that forex scholars' trading systems involving support/resistance breakthrough (the way these are described by the scholar) are rather likely to result in loss than in profit. This is one of the reasons for 95% of traders to turn their forex deposits killers.

Inasmuch as the support/resistance related theory is so mixed up and subjective, it is only to be guessed what sort of support/resistance reading-matter may be offered by modern forex brokers' websites.

Let's resort to sort of a brief investigation of support/resistance levels by way of May, 12, 2005 sample trading day analysis.

As of 09:00 MSK:

- EURUSD 1,2860

- GBPUSD 1,8850

Support/resistance recommended by "Alpari" analysts http://www.alpari-idc.ru/ru/analytics/levels/view/20060512/:

- EUR/USD 1,2720 1,2475 1,29 1,3160
- GBP/USD 1,90 1,9150 1,8540 1,8130

Comments: the Alpari Analytical Department Director Roman Pavelko is hardly able to teach beginners, assuming the following:

a). he has mixed up the EUR and the USD support and resistance;

b). being an intraday trader, he recommends going long on the GBPUSD at a 150-point distance from the current morning price, whereas it is common knowledge for any Masterforex Academy beginner, that after a 150-point travel any position on the GBPUSD should be squared at a local high, instead of waiting for a further 150-point intraday leap to 1,9150.

c). have You ever heard about an intraday trader, indicating a 450-point difference between support and resistance in his pending session trading plan (GBPUSD 1,90 - 1,8540)?

Fig. 15

Fig. 16

d). these recommendations aftermaths are apparent: the GBP has punched 1 point to 1,9001 and swiveled down to 1,8871; the EUR reached 1,2958 and reversed to 1,2853.

That said, do You think, someone's going to fire R. Pavelko from the Alpari Chief Analyst position? I rather doubt the fact. Hence, the question is: why should R. Pavelko be source of such sort of recommendations to naïve Alpari beginners and why is Alpari management happy about situation where traders turn losers after following these "recommendations"?

Brokers' recommended support/resistance on the EUR/USD and GBPUSD as of June, 12, 2006 morning:

www.fibo-forex.ru

- EUR/USD: support 1.2780, 1.2740, 1.2685/90 и 1.2600, resistance 1.2890, 1.2930/40, 1.3000.

(see: http://www.fibo-forex.ru/pages.php?page=90)

- GBP/USD support 1.8740, 1.8670, 1.8560, resistance 1.8890, 1.8940, 1.9000

http://www.fxteam.ru

EUR/USD support 1.2820 resistance 1.22940 (???)
GBP/USD support 1.8805 resistance 1.8950

(see: http://www.fxteam.ru/rus/forex/morning-signals/?action=show&id=2261)

www.fxclub.org

The June, 12, 2006 information on technical levels of EUR/USD и GBP/USD is missing with the support/resistance levels themselves being quoted in incidental unsystematic fashion.

(see: http://www.fxclub.org/trader_analytic/sec29/ and http://www.fxclub.org/trader_analytic/sec1249/)

www.e-capital.ru

EURUSD:
- support: 1.2840, 1.2800, 1.2770/50, 1.2720, 1.2670, 1.2630, 1.2600/1.2580, 1.2540, 1.2500,

1.2460, 1.2400/1.2390, 1.2350, 1.2300, 1.2250.
- resistance: 1.2890/1.2900, 1.2960, 1.3000, 1.3040, 1.3100, 1.3150, 1.3200/10.

GBPUSD
- support: 1.8840, 1.8800, 1.8740/30, 1.8700, 1.8670/60, 1.8630, 1.8590, 1.8535, 1.8500,

1.8450, 1.8400, 1.8360, 1.8300, 1.8270.
- resistance: 1.8870/80, 1.8915/20, 1.8940/50, 1.8990/1.9000, 1.9060.

(see: http://www.e-capital.ru/5_ta.asp)

www.forexpf.ru

EURUSD:

RES 4: $1.2990 RES 3: $1.2965 RES 2: $1.2940 RES 1: $1.2915
CURRENT PRICE: $1.2890
SUP 1: $1.2830 SUP 2: $1.2795 SUP 3: $1.2755 SUP 4: $1.2685

(see: http://www.forexpf.ru/_newses_/newsid.php?news=298261)

GBPUSD

RES 4: $1.9080 RES 3: $1.9000 RES 2: $1.8960 RES 1: $1.8915

CURRENT PRICE: $1.8895
SUP 1: $1.8815 SUP 2: $1.8725 SUP 3: $1.8725 SUP 4: $1.8515

(see: http://www.forexpf.ru/_newses_/newsid.php?news=298262)

Are You not getting mixed up? Each broker presents his own support/resistance levels different from others'. With the above diversity of levels being recommended any true/false breach of any technical level proves out of question.

Should we attempt to simultaneously depict all the support/resistance levels furnished by various forex brokers, we'll ultimately find ourselves facing a picket fence thereof.

The arrangement is reminiscent of J. Schwager's "Technical Analysis. Complete course", raising a question: "Is technical charting to be referred to as a prediction engine or as folk arts?"

Probably, the best way out here is:

1. In view of huge number of forex scholars' opinions, let everyone answer this question independently with the purpose of finding out the way to faultlessly pinpoint support/resistance levels.

2. Let everyone decide whether he is going to believe the support/resistance levels, released daily by various Brokers and Dealers, provided that:

a). one has no idea of the definition principles thereof;

b). the above levels being offered at websites by non-traders or by ex-losers.

Otherwise the natural result will remain equal to 95% of losers worldwide.

SUPPORT/RESISTANCE LEVELS CONSTRUCTION UNDER MASTERFOREX-V TRADING CONCEPT

1. Support and resistance levels are to be split into those of flat and trend:

a). support/resistance levels are horizontal when in flat;

b). support/resistance levels are inclined when in trend.

2. Various kinds of support/resistance are intrinsic to various trend types (if You are considering 4 trend types, You will face 4 R/S grids; if 5 trend types are being dealt with, there will emerge 5 R/S grids respectively).

3. A larger trend is of greater significance in respect to a minor one, whereas minor trend support/resistance levels are of more accurate nature than those of larger one. This issue has not at all been touched upon either by forex technical "scholars", or by modern "analysts".

4. All the 4 trend-type support/resistance detection procedure is elaborated in the fashion enabling the Masterforex-V Academy hundreds traders to daily set up support/resistance levels with 1-2 points deviation, due to forex quotes difference from various Brokers. This aspect has not been considered by forex technical scholars either.

5. It appeared indispensable to simultaneously analyze the minimum of 2 ally currencies' support/resistance levels (say, GBPUSD, EURUSD, etc.) since there is the formula:

"True R/S level breach by the forex pair 1 + False R/S level breach by the forex pair 2 = EITHER False R/S level breach by the forex pair 1 OR True R/S level breach by the forex pair 2"

This aspect has not been considered by forex technical scholars either.

6. Minor timeframes intermediate R/S levels (for the sake corrective depth calculation) ARE DIFFERENT from those being manifested under forex trendwise travel. This aspect has not been subject to investigation by forex technical scholars either.

7. The available technical analysis scholar literature on support/resistance levels contains plentitude of helpful and : data. The objective is to effect independent synthesis of T. Demark's, A. Elder's, E. Nayman's, J. Murphy's, D. Schwager's et al techniques with the above Masterforex-V principles in order to attain proper understanding of the way prior binary regularities tailor further movement perspectives.

8. A combination of 4 trends and more is helpful in 1-4 point-accurate detecting forex trading session local extrema.

With the above said, it proves strange to hear the statement of Ch. Lebau and D. Lucas (see: Computer-aided analysis of Futures Markets (http://forum.masterforex-v.org/viewforum.php?f=9), reading: "We do not believe in exact price prediction popular practice".

BUT THEN:

- What's the way the Masterforex-V Academy students manage to profit now and then?

- Are they being no-readers of forex analysts' numerous websites?

- Do they independently establish support/resistance levels on multiple timeframes of numerous

ally currencies?

- Do they check their established levels against a primary source (wherefrom the Brokers' analysts

use to crib a support/resistance)?

- Do they understand principles of true/false breaching of each level and of a bounce therefrom?

- Are they capable of calculating in-session currencies travel margins to a destination, whereafter

the above currencies bounce off and exhibit corrective reversal?

THE QUERY MAY GO ON:

Masterforex-V Trading Academy in English - http://www.masterforex-v.su

Masterforex-V Trading Academy in Russian - http://www.masterforex-v.org

BOOK II Chapter I THE MFV TRADING CONCEPT TREND DEFINITION

BOOK II Chapter I THE MFV TRADING CONCEPT TREND DEFINITION

To ensure steady profits at FX a trader is supposed to pinpoint faultless entries and exits. It's common knowledge, that a trend is the principal and the most compromising relevant area.

Hence, trend detection is the trader's PRIMARY target. If "The Trend Is Your Friend", entries should be executed trendwise and the profit should be allowed to flow, etc., there emerge questions to touch every live FX trader:

- what are the trend's criteria (bullish or bearish) - once known, it is a trader's conventional job to enter trendwise and let the profit flow?

- if the FX major rule quintessence is as simple as that, why 90-99% of traders suffer losses with enviable permanence?

Book I Chapter XI "Where trends are to be chased at FX or the trader's faultless profit segments", http://www.masterforex-v./001_011.htm analyses the FX scholars' and modern forum-speaker traders' overwhelming chaos in the field, ranging:

- from the Charles Dow classical definition that "a trend constitutes a vectored price travel, where each consecutive high is higher/lower than the foregoing one with each consecutive low being higher/lower than the foregoing one" (my opinion: the definition is obsolete and does not fit new FX realities)

- to some traders' purely absurd opinions on no trends at modern markets along with Eric Nayman's thinking of his trend varieties built upon no distinct criteria ("There are none of any strict rules, once forever established", - E. Nayman stipulates).

One of the factors responsible for traders' en-mass deposit losses is fairly understandable from the above. If there's no distinct definition of trend - then the question is: should entries be effected bullish or bearish trendwise and where should the profit be allowed to flow?

MFV TREND DEFINITION

From MFV standpoint a trend is a vectored price travel between two opposite reversal patterns. In-trend movement is of zigzag nature, i.e. there is a recovery wave following each pulse wave. The pulse/recovery ratio is indicative of the trend direction. Thus:

- under a bullish trend, the uprising pulse length exceeds the corrective bearish wave one;

- under a bearish trend, the bearish pulse length exceeds the corrective uprising wave one;

- under a sideways flat, the pulse and recovery durations are equal.

Figure 1 legend:

-  тренд = trend

-  коррекция = recovery

-  верхняя границафлэта= flat upper boundary

-  нижняя граница флэта= flat lower boundary

Figure 1. Trend and recovery

Figure 2.

Head'n'shoulders is a USDCAD reversal pattern with a bearish trend startup, where a downward pulse is longer than an upward corrective action. Respectively, a USDCAD W1 bearish trend is alive till there is a reversal pattern.

Figure 3.

As obvious from USDCAD W1 chart, there was no upward reversal pattern in 2003-2006. Hence the W1 bearish trend continues.

Figure 4.

Later on in Book II "TA in MFV trading concept" I will stage a detailed description of each component, attributable to the trend change, but for the time being only the critical ones will be referred to.

1. Atrend continues till there's a swivel, thus increasing the importance of reversal patterns, discussed hereinafter.

Reversal patterns are found at any trend's origination and termination. Thereby a trend constitutes the distance from one reversal pattern to another, being opposite:

- the start of a bullish trend is a reversal pattern of the preceding bearish or sideways trend;

- the bullish trend continuation is a trend continuation pattern (see Book II "Trend continuation patterns http://www.masterforex-v.su/book2.htm)being a retracement variety calling for a trendwise entry.

- the bullish trend termination being a bullish trend reversal pattern.

Here are the examples:

2. There is an arbitrary fall of classical bullish and bearish trend reversal patterns into:

a). reversal patterns resulting from a non-breakthrough of a next in turn resistance or support on a bullish or a bearish trend respectively:

- double top;

- triple top;

- double bottom;

- triple bottom.

with reference to drawings of classical trend reversal patterns from the following books by FX scholars:

John J. Murphy "Futures markets TA: theory and practice"

D. Schwagger "TA, comprehensive course"

A. Elder "How to gamble and win at the exchange"

A. Elder "Basics of exchange trading"

Larry Williams "Long-term secrets of short-term trading"

K. Lukas "Using TA at the world FX market"

A. Nayman "Minor trader's encyclopedia"

A. Nayman "Master trading. Secret materials"

see MFV Trading Academy Library at http://dma.masterforex-v.org)

Figure 5.

Figure 6

Figure 7

b). reversal patterns resulting from a false breakthrough of a next in turn resistance or support level:

- head'n'shoulders

- inverted head'n'shoulders

- spike.

And hereinafter in details:

A head'n'shoulders:

Figure 8

An inverted head'n'shoulders:

Figure 9

A spike:

Figure 10

3. Classical trend continuation patterns.

The centerline is that any trend is of zigzag nature:

- there is a counter-trend pullback following a trendwise pulse;

- the pulse is always longer than the retracement being the axiom of the Elliott's WA;

- a trend continuation pattern is but the Elliott's corrective waves variety

Therefore, each trend continuation pattern is integrated into a corrective model, whereupon a next in turn trendwise wave follows:

- a gap

- a quadrangle

- a triangle

- a flag

- a pennant

- a wedge

Below is a sample bullish flag. It is to be noted, that the bullish pulse is much longer than the bearish pullback.

Figure 11

A bullish pennant:

Figure 12

A bullish wedge:

Figure 13

A gap:

Figure 14

A quadrangle with the pulse and corrective waves equal to each other

Figure 15

Below are several sample trend continuation models within a single trend. Of interest is the bullish wave transfiguration into a pulse and the bearish wave one - into a corrective action, thus governing a bullish trend continuation.

Figure 16

Figure 17

Legend:

- флаг =a flag

- вымпел = a pennant.

CRITICISM OF CHARLES DOW'S CLASSICAL TREND DEFINITION

In last century thirties Charles Dow has proposed a trend definition up to now wandering from manual to manual and injuring traders in an irremediable manner. Please, once again go through Charles Dow's definition: "a trend constitutes a vectored price travel, where each consecutive high is higher/lower than the foregoing one with each consecutive low being higher/lower than the foregoing one".

Is it clear why his definition fails to properly account for modern trend realities?

According to Charles Dow, the trend core criterium is restricted to the fact that "each consecutive high is higher/lower than the foregoing one with each consecutive low being higher/lower than the foregoing one".

It leads to erroneous logics of stops allocation ("safety cushions" per Bill Williams) offered in practically all FX manuals: one to several points lower the previous low at uptrend or the previous high at downtrend.

Various timeframe figures below are illustrative of how this classical trick is used by the FX Game Organizer to blow off traders' stops, positioned in strict accordance with Dow's trend rules, included into the world's FX manuals.

What type of trend is here, proceeding from Charles Dow's provisions? Please, take pain to calculate how many highs are higher than the previous ones and how many lows are lower than the previous ones. And above all! How many traders' stops have been shot down here?

Figure 18

Figure 19

GENERAL TREND DEFINITION OUTLINE AS SEEN BY MFV TRADING CONCEPT.

1. Atrend is a vectored price travel between two opposite reversal patterns.

2. In-trend movement is of zigzag nature, i.e. there is a recovery wave following each pulse wave. The pulse/recovery ratio is indicative of the trend direction.

3. Classical patterns are incorporated within a recovery (pullback) model, followed by a new trend wave.

And now, assuming these paras 1-3, we will analyze the above figure 18.

By all classical canons the previous low of 1.9647 is to be followed by:

- the preceding trend denial according to Charles Dow's "uptrend tops and bottoms being higher than the previous ones";

- stop-loss orders placement.

Instead of stop-loss orders I resort to locking (see Book I http://www.masterforex-v.org/001_018.htm)

I am always putting a series of questions to staunch supporters of stops being placed in conformity with FX canons:

- Are You sure that the trend won't reverse at that point?

- If negative, why should You be placing a stop?

- But if You are certain, why don't You effect a concurrent opposite entry?

- What is Your piece of mind on how many traders in the world have placed stops along with You?

- Are You sure that the FX Game Organizer will not be tempted to knock down all the world traders' stops by way of a single gesture and to continue urging the previous trend further on?

The above sample chart of dated 01.12.2006 furnishes strong evidence of:

- WHAT FOR the world traders are trained to place stop-loss orders at the same point;

- WHAT FOR obsolete theories of Charles Dow and other FX scholars are published in millions of copies, being sufficient for ALL the traders throughout the world;

- WHY the 97-99% traders' loss statistics is identical through all the countries.

So, what's to be done to avoid plopping down into losers' swamp?

AT LEAST, You are to try to get the understanding of WHERE and WHY traders loose their deposits whereas, AT MOST, You are to attempt to elaborate Your own entry and exit algorithm.

To this end You are to give scrutiny to the chapters on reversal patterns and trend continuation, incorporating a detailed investigation of:

- shadow details of each trend retracement (recovery) - see the chapter on trend continuation patterns;

- shadow details of each trend swivel - see the chapter on trend reversal patterns;

- inaccuracies, innuendos and direct errors committed by FX scholars on the issue.

Putting it otherwise, You will have to find problems solution, many of the scholars (John J. Murphy, D. Schwagger, B. Williams, A. Elder, K. Lucas, A. Nayman, etc.) have failed to find.

AND BY WAY OF A PROMPT FROM MFV:

A head'n'shoulders reversal pattern should take shape to ensure trend reversal.

Figure 20

Legend: вариант = option

Options A and B are indicative of the points where the head'n'shoulders reversal pattern could be feasible.

Masterforex-V Trading Academy in English - http://www.masterforex-v.su

Masterforex-V Trading Academy in Russian - http://www.masterforex-v.org